Enday and Dodong are among the customers in the store. Those who came before

them are on a frenzy mode, grabbing goods mostly electronic gadgets and devices.

Anybody can sense the looming disaster. It arose from the government’s plan to

devalue the currency in the next day which will end the pesos parity with the dollar

after a period of soaring prices and economic woes.

Introduction SITUATION

I QUESTIONS

What is devaluation of currency?

Why do people are in a frenzy buying mostly electronic gadgets and devices,

specifically? Who are the winners and losers in currency devaluation?

How does devaluation of the currency affect the economy of a country? Is it

disastrous? If so, why did the government decide to do so?

What does “end the pesos parity with dollar” signifies?

How does Devaluation of currency help during a period of soaring prices and

economic woes?

IA STATEMENT OF THE PROBLEM

With its plan to devalue the peso currency in response to a period soaring

prices and economic woes, how can the government mitigate or buffer the risks and

adverse effects of the currency devaluation to its economy and to its people?

II DATA GATHERED

1. What is devaluation of currency?

According to Wikipedia:

“Devaluation on modern monetary policy is a reduction in the value of

a currency with respect to those goods, services or other monetary units with

which that currency can be exchanged. “Devaluation" means official lowering

of the value of a country's currency within a fixed exchange rate system, by

which the monetary authority formally sets a new fixed rate with respect to a

foreign reference currency.”

Devaluation in modern economies

Present day currencies are usually fiat currencies with variable market value.

Some countries hold floating exchange rates while others maintain fixed exchange

rate policies against the United States dollar or other major currencies. These fixed

rates are usually maintained by a combination of legally enforced capital controls or

through government trading of foreign currency reserves to manipulate the money

supply. Under fixed exchange rates, persistent capital outflows or trade deficits may

lead countries to lower or abandon their fixed rate policy, resulting in devaluation (as

persistent surpluses and capital inflows may lead them towards revaluation).

2. Why do people are in a frenzy buying mostly electronic gadgets and

devices, specifically? Who are the winners and losers in currency

devaluation?

Consumers are losers during devaluation. The purchasing power of their

currency weakens, or in other words, the general prices of goods especially

imported products will increase. Thus, in anticipation of increased prices as a result

of the devaluation, consumers are buying in a frenzy to buy electronic (imported)

gadgets at the moment when it’s not yet more expensive.

Other Winners and Losers in currency devaluation

Exporters (Winners)

Real Estate (Winners)

Illegal Currency Traders (Losers)

International Investors (Winners)

Tourists (Losers)

3. How does devaluation of the currency affect the economy of a country? Is it

disastrous? If so, why did the government decide to do so?

Exports cheaper. A devaluation of the exchange rate will make exports more

competitive and appear cheaper to foreigners. This will increase demand for

exports

Imports more expensive. A devaluation means imports will become more

expensive. This will reduce demand for imports.

Increased Aggregate Demand. Devaluation could cause higher economic

growth. Part of AD is (X-M) therefore higher exports and lower imports should

increase AD (assuming demand is relatively elastic). Higher AD is likely to

cause higher Real GDP and inflation.

Inflation is likely to occur because:

o Imports are more expensive causing cost push inflation.

o Aggregate Demand is increasing causing demand pull inflation

o With exports becoming cheaper manufacturers may have less

incentive to cut costs and become more efficient. Therefore over time,

costs may increase.

Improvement in the current account. With exports more competitive and

imports more expensive, we should see higher exports and lower imports,

which will reduce the current account deficit.

What Under Circumstances Might a Country Devalue?

When a government devalues its currency, it is often because the interaction

of market forces and policy decisions has made the currency's fixed exchange rate

untenable. In order to sustain a fixed exchange rate, a country must have sufficient

foreign exchange reserves, often dollars, and be willing to spend them, to purchase

all offers of its currency at the established exchange rate. When a country is unable

or unwilling to do so, then it must devalue its currency to a level that it is able and

willing to support with its foreign exchange reserves.

A key effect of devaluation is that it makes the domestic currency cheaper

relative to other currencies. There are two implications of devaluation. First,

devaluation makes the country's exports relatively less expensive for foreigners.

Second, the devaluation makes foreign products relatively more expensive for

domestic consumers, thus discouraging imports. This may help to increase the

country's exports and decrease imports, and may therefore help to reduce the

current account deficit.

There are other policy issues that might lead a country to change its fixed

exchange rate. For example, rather than implementing unpopular fiscal spending

policies, a government might try to use devaluation to boost aggregate demand in

the economy in an effort to fight unemployment. Revaluation, which makes a

currency more expensive, might be undertaken in an effort to reduce a current

account surplus, where exports exceed imports, or to attempt to contain inflationary

pressures.

4. What does “end the pesos parity with dollar” signifies?

Investopedia defines Purchasing Power Parity (PPP) as:

“An economic theory that estimates the amount of adjustment needed on the

exchange rate between countries in order for the exchange to be equivalent

to each currency's purchasing power.”

In other words, the exchange rate adjusts so that an identical good in two

different countries has the same price when expressed in the same currency.

For example, a chocolate bar that sells for C$1.50 in a Canadian city should

cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S.

is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)

Price level ratio of PPP conversion factor (GDP) to market exchange rate

Purchasing power parity conversion factor is the number of units of a

country's currency required to buy the same amount of goods and services in the

domestic market as a U.S. dollar would buy in the United States. The ratio of PPP

conversion factor to market exchange rate is the result obtained by dividing the PPP

conversion factor by the market exchange rate. The ratio, also referred to as the

national price level, makes it possible to compare the cost of the bundle of goods

that make up gross domestic product (GDP) across countries. It tells how many

dollars are needed to buy a dollar's worth of goods in the country as compared to the

United States. PPP conversion factors are based on the 2011 ICP round.

5. How does Devaluation of currency help during a period of soaring prices

and economic woes?

Devaluating a currency is decided by the government issuing the currency,

and unlike depreciation, is not the result of non-governmental activities. One reason

a country may devaluate its currency is to combat trade imbalances. Devaluation

causes a country's exports to become less expensive, making them more

competitive on the global market. This in turn means that imports are more

expensive, making domestic consumers less likely to purchase them.

While devaluating a currency can seem like an attractive option, it can have

negative consequences. By making imports more expensive, it protects domestic

industries who may then become less efficient without the pressure of competition.

Higher exports relative to imports can also increase aggregate demand, which can

lead to inflation.

A significant danger is that by increasing the price of imports and stimulating

greater demand for domestic products, devaluation can aggravate inflation. If this

happens, the government may have to raise interest rates to control inflation, but at

the cost of slower economic growth.

Another risk of devaluation is psychological. To the extent that devaluation is

viewed as a sign of economic weakness, the creditworthiness of the nation may be

jeopardized. Thus, devaluation may dampen investor confidence in the country's

economy and hurt the country's ability to secure foreign investment.

Another possible consequence is a round of successive devaluations. For

instance, trading partners may become concerned that devaluation might negatively

affect their own export industries. Neighboring countries might devalue their own

currencies to offset the effects of their trading partner's devaluation. Such "beggar

thy neighbor" policies tend to exacerbate economic difficulties by creating instability

in broader financial markets.

Since the 1930s, various international organizations such as the International

Monetary Fund (IMF) have been established to help nations coordinate their trade

and foreign exchange policies and thereby avoid successive rounds of devaluation

and retaliation. The 1976 revision of Article IV of the IMF charter encourages

policymakers to avoid "manipulating exchange rates...to gain an unfair competitive

advantage over other members." With this revision, the IMF also set forth each

member nation's right to freely choose an exchange rate system.

STRENGTHS (Pros)

WEAKNESSES (Cons)

Exports are cheaper. Imports are more

expensive. With exports more

competitive and imports more

expensive, we should see higher

exports and lower imports, which will

reduce the current account deficit.

Increase in Aggregate Demand

resulting to Increase in GDP

Devaluation will be favorable to

Exporters, Real Estate, and

International Investors

Inflation is likely to occur

If demand is price inelastic, the fall in

the price of exports will lead to only a

small rise in quantity. Therefore, the

value of exports may actually fall.

By making imports more expensive, it

protects domestic industries who may

then become less efficient without the

pressure of competition.

(Psychological) Negative Image

brought by the devaluation might

discourage investors (top-down)

OPPORTUNITIES THREATS

Future revaluation of the currency and

stronger economy

If the global economy is in recession,

then a devaluation may be insufficient

to boost export demand

III ANALYSIS OF DATA

1. Encourage consumption of locally produced goods

The government should encourage consumption of locally produced goods to

increase demand of locally produced goods instead of the imported goods.

PROS – Increase in demand of locally produced goods will increase production of

local manufacturer will make prices and quantity of imported goods dropped, helping

eliminate trade deficits. Also, GDP will also increase.

CONS – Importers and existing Foreign companies in the country might lose

because this movement. Thus, companies might close and workers will get

unemployed.

2. Increase local production of usually imported goods with increase of cash

inflow from foreign investors

One of the positive effects of devaluation is that foreign investors are more likely

to invest because they will have greater returns as compared to their investments

before the devaluation. Local companies should utilize this influx of foreign

investment for the manufacture of the usually imported goods, making the country

self-sufficient and settle trade deficits.

PROS – Increase in GDP, Lessens imports and trade deficit.

CONS – Some goods are just more advantageous to import than to manufacture

locally, such as petroleum, etc.

IV COURSES OF ACTION

3. Increase disposable income of citizens by imposing lesser tax or more tax

exemptions and by increasing wages.

By increasing the disposable income of the citizens, aggregate household

spending will increase, boosting multiple industries in the country. This will help the

people of the country counter the negative effects of devaluation. Instead of

protesting against the government’s decisions, the people could get positive

disposition about the devaluation of currency. This will lessen chaos and social and

political unrest.

PROS – Boost in disposable income boosts spending, helping the economy grow.

CONS – Exacerbate inflation because of increase cost of labor and decrease in

government revenues.

Devaluation of currency is principally intended to invert the trade deficits into

surpluses, in hope of making the economy of the country to perform better and battle

adverse effects of inflation and other economic issues. Although it is advantageous

for a country, devaluation also poses threats and risks in its implementation. The

challenge is to minimize the damages that it may bring to the economy.

In devaluation, there are winners and there are losers. It is the role then of the

government to mitigate the losses that the losers are incurring to impede further

economic disaster. We believe that the devaluation, with its risk and threats, is still

more advantageous move of an economically distressed country especially amidst

huge trade deficits.

Considering that it is highly necessary for the country to impose devaluation

of the currency, we recommend that the government exert more effort in minimizing

the adverse effects, the risks and the threats that the devaluation.

In order to minimize these adverse effects, our group recommends that the

government do the following including but not limited to (1) encourage consumption

of local produce, (2) be more self-sufficient by producing locally the usually imported

goods as long as it is more beneficial than costly, and (3) increase the disposable

income of the citizens by increasing statutory wages and increasing tax exemptions.

V CONCLUSION

RECOMMENDATION

Wikipedia, Devaluation retrieved from

https://en.wikipedia.org/wiki/Devaluation

Prengaman, Peter (2015, December 18) Winners and Losers of Argentine

Currency Devaluation, retrieved from

http://abcnews.go.com/International/wireStory/winners-losers-argentine-

currency-devaluation-35828868

Investopedia , Devaluation Definition retrieved from

http://www.investopedia.com/terms/d/devaluation.asp#ixzz3ujxbkJfp

Economic Effect of a Devaluation of the Currency retrieved from

http://www.economicshelp.org/macroeconomics/exchangerate/effects-

devaluation/

Currency Devaluation and Revaluation retrieved from

https://www.newyorkfed.org/aboutthefed/fedpoint/fed38.html

Investopedia , Purchasing Power Parity (PPP) Definition retrieved from

http://www.investopedia.com/terms/p/ppp.asp#ixzz3ujyJDnYM

REFERENCES